Hi. Welcome to the presentation of Swedencare's half year report, led by our CEO, Håkan Lagerberg, and CFO, Jenny Graflind. We will have a Q&A session after the presentation. Please raise your hand if you have any questions, and we will answer them in the end. Jenny and Håkan, the stage is yours.
Hello, good morning. Here's Håkan Lagerberg and Jenny Graflind, we will present the Q2 2023 highlights. Sales record 9% organic growth. Yes, we had a strong Q2 when it comes to sales. Both the quarter and the month of June was actually our strongest quarter and months ever. We see continued strong growth in Pet Retail and Online, bit softer veterinary sales as for the ones of you that follows the market, several veterinarian companies have released the numbers and expectations that the 2023 year is a bit softer. For us, we definitely see a change of interest, also which I will present a bit further down in presentation.
We have started to deliver on our major agreements with MWI and Patterson. Half year will definitely be stronger for us when it comes to veterinary channel. We are also, when it comes to the contract manufacturing side, we see increased orders for the second half year. I do think that also the veterinary sector as a whole will be stronger second half year than the first. Our organic growth, 9%, almost 10. We're on track. Not where we really want to be, my expectations for a second half year is definitely stronger.
Both Q2 last year was a very strong quarter for us, when it comes to the situation with the restocking, that has definitely come to an end with this quarter. I expect that all our major entities will have organic growth next quarter and going forward. This quarter, we still had a couple of entities with a minus in growth. Lower margin and strong cash flow. Jenny will explain the reason for the lower margins, the cash flow continues to be strong, and we focus on that a lot, of course, since we are very dedicated to keep on paying down our debts that we have, and also that we have...
last year, we made lots of, let's say, investment, both in organization processes and also some CapEx that affected our cash flow last year. The big event in Q2 was perhaps the summarized public member tender offer. That offer has ended today, and we will communicate when we get the information of how many shares was accepted to the offer. We will communicate that. As I wrote in the report, and also the board has communicated previously, is that myself and all other major shareholders that I know have not accepted the offer, and we continue to work very well together with Symrise to grow the company going forward. We made one small acquisition in the quarter, a concept called Vet Buyers Direct.
I wouldn't say not unique, but for us, a very interesting concept where we have agreements with individual clinics or animal hospitals or groups of with a subscription model. The individual clinics, they pay a monthly subscription model, and in return, they will get special prices for lots of interesting products that we have both under a completely unique brand called Gen-Teb, but also some of our other group brands are offered in this concept. It's a very new way of thinking and also an attractive way for clinics to be able to get some sort of rebate on the byproducts that they sell in high volumes.
We have, we started last year, and we acquired the company this quarter, and now we have a bit over 600 clinics subscribing, and it grows a lot every month, I would say. Our sustainability work continues, and the highlight for the quarter was definitely the, for the first time, we made a group employee survey, and I'm very glad to be able to announce that we had excellent results with happy and motivated employees all over the world. We will work with all of the results, where that needs improvement, we will definitely do that. Overall, very good results for all of the group companies and as a group in total.
Okay, a few figures to explain the result of the quarter. We have grown from SEK 470 million- SEK 572 million in revenues, 21%. That is including 9% organic growth. It also includes 1% acquired growth, which is coming down from CVP and Vet Buyers Direct. It does not have a huge impact on revenue yet, and CVP, as I wrote in the report, will have a much more impact on the second half of the year. We also had a 2% reclass effect and a 9% currency impact on revenue. When it comes to EBITDA and profitability, in value, it's about the same as last year, but in margin, it's both lower than last year and a bit lower where compared to where we want to be.
Q2 last year was the highest EBITDA that we had achieved in the past, and in margin, it was also the highest one that we have had since beginning of 2021. It's difficult comps, but I will also explain in the following slides why we were a bit lower margin than we want to be. Some KPIs for the quarter. First of all, when it comes to revenue, again, we had a record quarter, we continued to grow quarter- on- quarter with revenue. Compared to last quarter, we still had a 9% increase with almost exactly the same structures as we had. It was CVP and Vet Buyers Direct, which had not a big impact on revenue.
When it comes to the gross margin, this is mainly affected by the challenges that we have to optimize the production, as well as we have less and delayed development projects, which those projects of development have a higher margin than our average. In addition to that, we also have some costs associated with the launch of Scoopables, but the majority is coming from production and the delayed development projects. This, of course, has a direct impact on our EBITDA. In addition to that, our external cost is about the same percentage of sales that we've had in previous quarters and also last year's.
One of the reasons why we don't see so much economy and scale on the external cost is that as we grow revenue with Amazon, we also acquire higher cost linked to that. When it comes to cash, despite the growth in revenue and like Håkan said, a record June, we have an immaterial effect on our working capital, which is good. During the quarter, we have paid both the dividends of SEK 35 million, we have also done the acquisition of Vet Buyers Direct, that Håkan mentioned, and we have still been able to amortize SEK 50 million on our loans. Our net debt to EBITDA on a pro forma basis that we report to the bank, is SEK 3.4 million, which is, of course, below our governance.
For the first half year, all markets have shown a strong growth in revenue, both organically and by acquisition. Again, as some of you probably know, we acquired NaturVet in February last year, and also Innovet in March 2022. Online continues to grow strong. One example is Amazon's seven European markets, except for U.K., which we call EU7. They have, for the first six months, exceeded the full year 2022 sales. The U.K., which is the largest Amazon market, has their best two quarters in history this year. I can mention a couple of things on cash.
For the first six months, we have a positive effect on our working capital of about SEK 15 million, for the first six months, we have made investments of tangible and intangible assets of about SEK 20.9 million, which is about half of what we did for the same period last year, and it corresponds to about 2% of our total revenue. Our rolling four quarters, as you can see, is growing well in terms of revenue. It's above SEK 2 billion right now, it's a little bit a flat movement, I would say, when it comes to profitability. Product and brand split for the quarter. The biggest category is our nutraceutical, we have had growth of 32% in this category. This growth is coming from.
The main reason is the NaturVet had a record quarter, and they are selling products in this category. Of course, we have also acquired CVP, and also Vetio South has started with their Soft Chews production since Q2 last year. Another positive thing is the ProDen PlaqueOff. ProDen PlaqueOff had a 45% growth compared to last year. It grows in all subcategories, it's primarily the powder that is growing very fast, which is well suited for the online trade. The Soft Chews, which is the latest addition to the product category, has sales in the quarter, which is more than 50% higher than we had of the last year, full- year.
Okay, looking at the different regions. 80% of our total revenue comes from North America, of course, the most important market for us, and glad to say that we showed a 25% growth quarter-on-quarter. As I mentioned, in the beginning, Pet Retail and Online, definitely the strongest. Veterinary side, a bit softer, but worth to mention is that both the Patterson Veterinary collaboration that started a bit prior to MWI Animal Health, but both of these projects had their strongest month for the year in June, the launches has started now. It's really taking off now, and I expect a even stronger second half year.
In Vetio South, we still we are fairly flat when it comes to sales and manufacturing, but not at the expected level in profitability. We have been working very hard with that. The team in Vetio South has made lots of efforts for this and we see some improvements, but definitely we expect a higher profitability the second half year. We also have a when it comes to manufacturing, economies of scale is, of course, important, and we have a strong pipeline, both external and internal projects, that will come to fruition in the second half year. We do expect that Vetio South will start to deliver as we expect.
Vetio North had growth in their sales, but as Jenny said, there was a bit challenging mix when it comes to the different projects. Not as much development as we had planned, more manufacturing and startup in manufacturing also comes with a bit lower profitability. Vetio North comes with the same expectations for second half year to have a stronger profitability. Worth mentioning is, we have signed several new agreements when it comes to Vetio North. We have an attractive setup in Montreal, Canada, with very skilled teams up there. Interesting to see, as I mentioned in the report, is that we now have the customers from all of the five continents in Australia, South America, North America, and Europe.
The newest addition to that geographically wise is Asia. Our first Asian customer, and that just shows the attractiveness of the animal health in the pharma sector. Very glad to be able to present a new customer. Mentioning, that's a unique concept that we have in Vetio North, that we have as of now, basically just used for our internal, or customers that we develop the products for, FlavorPal. It's a flavoring product line, a unique one that we have trademarked and patented. No, not patented, sorry.
We have now started to have interest from different pharma companies to be able just to buy the actual ingredient, the flavoring ingredient, and have stability test out with many customers. That would be interesting to see when we start to deliver that. Pet MD, our online specialist in the US, grew yet again, over 30% of the quarter. It's both counting in the Pet MD brand that grew very, very well, and also Rx and ProDen PlaqueOff's Amazon sales. ProDen PlaqueOff continues its success, 76% growth in North America.
As Jenny said, it's the powder product still, our first product ever, in this product line that just continues to grow very strongly. Adding to that, the Soft Chews starting to come out in all of the, let's say, pet retail space. Still we have PlaqueOff launches still this second half year with a couple of big retailers, so we expect a strong second half year as well. In NaturVet, as Jenny said, had a really strong best quarter ever with the Scoopables launch. NaturVet, as you may remember, was hit last year by the big retailers destocking from the inventories. We definitely have seen lots of improvements there.
Of the big three, I would say two of them is definitely growing a lot, and the third one is expected to grow in second half year. There's more to come there, and the scoopable launch has been over expectations, so we're very happy for that. Continued with, since it's our biggest geography, we of course, focus a lot on intra-group synergies and sales projects. Lots of stuff happening all the time, everything from cost synergies, but predominantly sales synergies. One example I can mention is that the Vet Classics brand that comes from Garmon/NaturVet, has been taken over when it comes to distribution to the veterinary channel for Stratford Care organization.
Very, very excited to see that. We continue to move from external manufacturing to internal. We have a special fulfillment center, and we're collecting all of the different fulfillment customers that our group companies have to be transferred to FAV as our fulfillment specialist. Also, we have just launched a NaturVet liquid line from being supplied from Vetio under the NaturVet brand, and we're gonna be excited to see how that delivers. Going over to next region, Europe, 16% growth, 18% of our total revenue. We see some of the Southern European markets that were slow last year and started off slow this year, has come back.
For example, can mention Spain and Greece as good examples with strong growth. Online sales has been really good. As Jenny said, EU7 has sold even more than full- year last year. Amazon U.K., I think, was up plus 40%, so very strong in the online side. Nutravet, one of our group companies that has a very unique offering and a position on the specifically on the U.K. veterinary side, has been for the last year, and then this start of this year, was affected by their biggest customer trimming down the inventories.
I'm glad to report, as I said in the Q1 report, that Q2 is definitely the last quarter where that will have any effect on the sales. For the other channels where they're selling products, they have been growing really nicely and Nutravet will be an important part for our organic growth, the second half of the year. CVP has been renamed to Vetio U.K., and lots of collaboration between Vetio U.K. and Vetio South in the U.S. Also, Vetio U.K. has now transferred equipment to Swedencare Ireland. In Q3, we will start manufacturing Soft Chews in Ireland.
As some of you remember, the Soft Chews under the ProDen PlaqueOff brand has not been launched in Europe yet. That will be manufactured both in the U.K. and on Ireland. The launch is Q4, Q1 next year, perhaps. We have a new addition to the team, László Varga , new European Chief Commercial Officer. He will start mid-August, and we're very happy for that. He has a vast experience from, let's say, International European business, and he will be a great addition to the team. Looking at the rest of the world, a decrease by 19%, but not that uncommon when it comes to rest of the world sales, because many of our customers, they order perhaps 2x a year.
But one effect that we have seen is that for some of our U.S. brands, there has been a bit slower sales due to the strong dollar. Price points-wise, it has been a bit difficult for some of the Asian markets. Also there we see increase going forward. I expect that to bounce back. ProDen PlaqueOff had a very good quarter with both Asian markets and South America, Israel, and Australia. I mean, it had very tough comps when it comes to ProDen PlaqueOff last year. That was the best quarter last year when it comes to export markets, but we actually managed to beat that just so that we're very happy with that.
ProDen as an ingredient in Petfood continues to grow. Our best year ever as of now. We have exceeded full- year sales last year already. We have signed two new partners that we launch products probably next year. Could be end of this year, but we still continue to grow those collaborations. Purchase going forward, the same as we presented at the last quarter. It's really growth and profitability and lowering our debt level. That's really the key focus. We knew that going into this first half year, that we would be a bit lower in profitability since we had lots of things happening. I'd absolutely expect us to bounce back profitability-wise and continue our growth and.
That will definitely continue over 2023 and 2024. We have presented a couple of strong customer collaborations, but we still have a strong pipeline, lots of interest for what we can offer as a group. Stay tuned for that. We'll continue to take the advantage of getting help from other great organizations in the world to grow ourselves.
The continued move from external to internal, that's absolutely continued project, and I'm happy to say that, looking at, for example, Swedencare Ireland and also our small manufacturing site down in Texas, that makes the powder product for ProDen, they both have had a fantastic quarter with where you can see when we push the internal projects due to our own manufacturing site, we have been able to show really strong profitability. Solidifying relationships with major customers, we just keep on being very active and trying to find new ways of collaborating with long-term customers, and that will continue to be our focus.
Looking at M&A, we made a small acquisition this quarter, looking at the market as a whole, it's been a bit slower than comparing to the last years. I would say that starting to pick up, you are probably aware about a couple of big acquisitions in the market. We will focus on adding probably a bit smaller additions, bringing something unique to the group. We have dialogues, as we've said, this year will be a bit slower when it comes to acquisitions, definitely value-wise.
That was our presentation, back to you, Alyona.
Yes, by that, we are open for questions. We received the first question in the chat, so I will read it for you. Dear team, well done for the great results. I am very curious on your comments on the end of the stocking in pets. How long has that been going on, and what gives you confidence we are at the bottom, especially in the context of huge demand for pets in 2020 and 2021, and fears that this stocking might take a bit longer, as we see normalization in pets ownership over the next couple of years?
Coming back to the demand from the market is that where we are active, 90% of the products that we sell are basically focused on nutraceuticals that you start using, let's say, middle-age for the pets. We haven't really gotten the COVID boom has not really hit the nutraceutical market. That's why we're fairly confident that we will our niche in the market will grow strongly in the coming years.
Looking at the why we're confident, it's really that seeing improvements in ordering going forward, and from the customers that we get reports when it comes to the stock levels, we definitely see that they are down to where they want to be and need to fill up regularly going forward. We're fairly confident on that.
Yeah, and I can just add on Nutravet, for example, which was the major company that was affected by the stockings in this quarter. We saw orders start picking up now in May and June, so that's also give us a good comfort level on that.
Thank you. Our next question is from Rickard Anderkrans, Handelsbanken.
Hello? Hello, can you hear me?
Yeah, we hear you.
Perfect. Good morning. Thank you for taking my questions. I have a few. First one, starting with the gross margin, you previously mentioned that you expect to return to, you know, around the 58% level during this year. Is that what you expect for H2, or how should we think about sort of the gross margin improvement trajectory just in the, in the next few quarters and going forward? Thank you.
We didn't expect. we were expecting that the production optimization would have had a positive effect in this quarter, which it did not. Now, I hope all those issues are behind us, and I hope that we will see a good improvement next quarter. It's difficult to say. I hope absolutely we will be at 58% during the year, at least at the second half of the year. For the full- year, due to the fact that this was a little bit lower, I'm not 100% sure yet, but we should absolutely improve our gross margin in the second half.
All right, thank you. That's very clear. Can you expand a little bit more on the challenges for Vetio in the quarter? You know, how quickly do you expect the margins to rebound? You talked a little bit about the visibility that you have there and any data points that makes you very comfortable in the sort of recovery and rebound.
I would say a bit different in the different Vetio sites. Looking at Vetio North, it's really the mix of manufacturing and development projects that has a huge impact. When it comes to development projects, it's not in our hands always to when we can expect the work. It's lots of external factors when it comes to that. This quarter, we had lower development projects, and that has a big impact on Vetio North. Also linked with upstart with some manufacturing in Vetio North that wasn't even manufacturing is lower when it comes to gross margin, but it was lower than expected.
They have addressed those issues, and we feel confident that it will definitely be a lot stronger second half year. Looking at Vetio South, it improved end of the quarter, and together with the organizational changes we have made, focusing on operators in the manufacturing, together with, as I said, the scalability, we have lots in the pipeline. The gross margin helps, and overall also, when we have more work and constant work in the same types of products. I would say that we are confident that second half year will be stronger on those sites.
All right, thank you. You talked a little bit about the margin pressure coming from the Online channel as well. Can you remind us of the share of online channel in the quarter, roughly as percentage of sales? Did you expect the sort of additional increase in sales fees to continue from these channels, or is it flattening out? Any, any commentary around the sales fee increase, and the outlook would be helpful. Thank you.
When it comes to the sales fee, it's a connection, it's a, it's a link. Sales fees and also some, let's say, marketing investment that we make in that channel. I would say that the sales fees are, we are addressing that a lot, being more, absolutely more focused, and have a dialogue with Amazon about that, because they have increased percentage-wise a lot more than we expected. For some of this, we can address and improve, and I've already seen improvements. For some of the charges, we can choose a different way of handling it.
We are in strict, let's say, dialogue with Amazon, and also choose a bit different strategies going forward. It will improve, but it's been tough because at the same time, we are very focused in growing the sales online. We have a huge success there. it's. Now I would say that we focus a lot more on coming down to the right level when it comes to the sales fees. Some we can't, we can't do anything about, but certain of the number of the fees we can do something about.
We also have a dialogue, as I said, they have been appreciative also of our position in the markets and perhaps, change some of the fees. That's been, let's say, favorable for us.
When it comes to the percentage share, we usually say that it's about 40%. I would say it's slightly higher this quarter. It's difficult, like we have mentioned in the past, to say the exact number, due to the fact that some of our distributors are also selling online, and we don't know the exact exact share, but say around 40%.
All right, thank you. Just a final quick one, if I could. On the Vet Buyers Direct deal, can you kind of talk about the, you know, what's the annual sales of that business? What type of EBITDA margin does that business generate? What do you expect for the midterm organic growth profile for that company?
It-
Would be interesting with some more.
Yeah, it's a newly started concept. I mean, for us as a group, they are very, very, very low, so they won't have an effect on our, let's say, sales or organic growth, but they will. That will be, as I said, 600 clinics and clinics order, I mean, between $500 to a couple of thousand dollars per month. It's still small, but growing very fast. Let's come back to that later on. It won't have any impact, I would say, in our 2023 sales, not much.
All right, thank you. I was just curious because I believe that in the report, it says that Vet Buyers Direct contributed around SEK 7 million.
No, sorry. No, that was-
Yeah
CVP and Vet Buyers Direct.
Oh, right. All right.
90% of that was probably.
95% of that was probably CVP.
Okay, perfect. That was a mistake from my end.
That's all right.
All right. Thank you for taking my questions.
Thank you. Our next question is from Adela Dashian. Please go ahead.
Yes. Hello, can you hear me?
Yes.
Yeah.
Excellent. Hi, Håkan and Jenny. Just a couple of questions from me. To follow up on the Vet South and Vet North comments here. What's different between the headwinds that you're experiencing now versus the ones that you experienced towards the latter half of 2022? Given that there is additional comments regarding the delays in projects and so on and so forth. Are these new challenges or have they persisted since the second half of 2022?
A bit different between the different sites. Starting off with Vetio South, we have been working very hard, the different quarters, in both in, let's say, supply chain, and organization and personnel setups, and also having some challenges with starting up some large external customers, where we had to take a hit when it comes to profitability. I would say they're not exactly the same challenges. We are definitely on the right track, and we see that in now in Q2 is the last setbacks. We didn't get full...
The big thing in Q2 was really optimizing the production lines and having the right staffing. That didn't have full effect until, or still not really full effect, but we've seen improvements of so. That together with a stronger pipeline, higher manufacturing projects, will have a positive effect on Vetio South going forward. I would say that. Looking at Vetio North, it's really... I mean, they had a fairly strong second half year when it comes to sales, and they were also good in profitability last half year.
For Vetio North, it's more, still having growth, but this quarter, they had some unexpected costs and some project delays that really affected the profitability of the operations. I would say that a bit different. Vetio South is more, has been more factors that we really can address ourselves. Vetio North is very dependent on when it comes to development projects, it's lots of, let's say, external factors and timelines that we can't really control all the time.
Yeah, that makes total sense. Thanks a lot for that. I was also wondering about the discrepancy between, you state in the report that sales to veterinary clinics or I guess, underlying momentum, within that sales channel is slowing or is softer than online or pet retail. Would you be able to go into greater detail on why that is, if the underlying demand from the end customer point of view is still intact?
It's hard to say. I think one big issue is, of course, the inventory levels. That was a bit slower, let's say, to come back in the veterinary channels. I think also there's been some changes. Looking at the North American market, markets, there has been some changes. Some of the major players have decided to change their way of selling out to the market, avoiding some buying groups, avoiding some direct sales, just going through a distributor instead of... that has affected some of our bigger customers to Vetio South, really to just change their way of selling. that has definitely affected us.
I would say in general, could. It will be interesting to see, but as we've seen also is that could be a bit different way of the pet owners buying products, finding products more easily online and has become used to that during the pandemic. Who knows? Let's see how it pans out. What we have seen is that the confidence level of our veterinary customers is stronger for the second half year, and we have seen increased orderings coming in. Perhaps it was just a bit delayed compared to the Pet Retail side.
Yeah, got it. Then on the comments regarding your Online sales channels and the increased costs there, are you doing anything proactively with your prices to offset the increased costs to you set by the Online platforms? Or do you believe that you will be able to reduce the costs through active dialogues with your customers on that side?
Absolutely, absolutely a combination. It's also not only, I mean, general price increase. It's also, for those of you that are common to the way our sales are in Amazon, we are very focused on working towards diverters. Diverters is the sellers on Amazon that buy our product from a distributor and then puts it up online and lowers the price, and that affects all of the algorithms of Amazon and also Chewy, for example, because they follow each other a lot. We have been work with our major brands, NaturVet, FortiFlora, Rx Vitamins. We have been working really hard this last year to get rid of diverters, and that has been a long and hard work, but it's been successful.
We, when we, let's say more or less get rid of those diverters, the pricing on Amazon will be better by, let's say, automatically. Of course, we also look at as price increases per se. I would say that our hard work with the getting rid of diverters has started to show in our numbers. That's also really good for the second half year that we have been working very diligently with that.
Sounds good. Then finally, just on your continued work to move, from external manufacturing to internal, would you be able to give us a percentage of sales, of how much your internal manufacturing accounts for of the total pie to date?
Roughly 70%-75% is internal.
Yeah, at least 75%, I would say.
Excellent. Thank you very much.
Thank you. That concludes our Q&A session, so I hand the word back to you, Håkan and Jenny, for any closing comments.
Thank you for the interest. It's in the middle of the summer and vacation period, we're happy to have so many join us. I would like to give a big thank you to all of the organizations that have been working really hard, we're very focused in, as we wrote in the report, we're very focused on keep on growing, but, and increasing our profitability. That will be the main focus for us going forward.
Have a great summer and a great day. Bye-bye!